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In accounting, an identity is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true. The term is also used in economics to refer to equalities that are by definition or construction true, such as the balance of payments.

The most basic identity in accounting is that the balance sheet must balance, that is, that assets must equal liabilities (including equity), or that assets must equal debt plus equity. In its most common formulation:

Assets = Debt + Equity

Where an accounting identity applies, any deviation from the identity signifies an error in formulation, calculation or measurement. Since the accounting identity must always hold, any change to one side of the equation must be balanced by an equal change on the other side of the equation: a change to the total value of the assets of a firm must be reflected in a change to the debt or equity of a firm. For example, if a firm has an (uninsured) asset destroyed by a fire, either the debt of the firm must fall, or the equity (in this case, likely the equity). In most cases, each component of an accounting identity can be broken down into further sub-groups that must also respect the identity.

Accounting identities also apply between accounting periods, such as changes in cash balances. For example:

Cash at beginning of period + Changes in cash during period = Cash at end of period

This usage of the term identity is similar to the mathematical definition of an identity.

Contents 1 Economics 2 Examples 2.1 Value of an asset 2.2 Gross domestic product 3 References 4 See also

In economics, there are numerous accounting identities. The most commonly known is the balance of payments identity, where:

Current Account + Capital Account = Change in Official Reserve Account

Any asset recorded in a firm's balance sheet will have a carrying value (also known as book value). By definition, the carrying value must equal the historic cost (or acquisition cost) of the asset, plus (or minus) any subsequent adjustments in the value of the asset, such as depreciation.

The basic equation for gross domestic product is also considered an identity:

GDP = consumption + investment + (government spending) + (exports − imports)

The Basic Accounting Identity]

Identity

Accounting

Balance sheet

Du Pont Identity

Balance of payments